2012: The Year Microsoft Finally Battles Back

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With an upgraded X Box, Windows 8 and a touted new phone, the onetime industry innovator is back, and in an arms race with Apple and Google

In the constant game of thrones that is the Silicon Valley tech giants’ battle for dominance, 2012 could be the year that Microsoft comes back from exile.

Having lost its beat about a decade ago, the software giant has more recently been plotting an aggressive grab for territory.

And it's getting back in the game with actual innovation.

Flush with capital from its steady core businesses of software and servers, the company has been quietly busy with research and development in recent months and years.

The results are showing.

>> Windows 8, expected to come out in February in beta, is meant to operate at the heart of a Microsoft-wide ecosystem, one that bids to challenge Apple’s intuitive array of linked devices and functions. In introducing 8 at a developer's conference in Anaheim in September, Microsoft CEO Steve Ballmer (pictured) was expansive, promising, "If Windows 8 is Windows re-imagined, we're also in the process of re-imagining Microsoft."

>> The X Box 360’s upgrade, via an improved dashboard and the Kinect add-on, is ahead of the pack as a user-friendly voice- and gesture-controlled device and stoking enthusiasm not only among the early adopters and tech geek websites but on Wall Street. With its inviting user interface, it set a record for Black Friday weekend console sales.

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Demand was so great that the national Black Friday X Box stampede, in which 800,000 units were sold, included what may be the first single-person-shooter shopping brawl, in which a Los Angeles woman pepper-sprayed the competition in a frenzy over half-price X Box 360s at a Walmart.

"The X Box is optimized for television and already connected to 50 million TV sets," says influential tech consultant and former head of digital for Oprah's network Robert Tercek. "If they can get everybody to sign up for their service [no mean feat with an upfront $60 fee to join X Box Gold and monthly charges for access to some channels], they could be as big a player as Netflix."

>> Nor is the company shrinking from a battle for mobile phone — and tablet — business now dominated by Apple and Google’s Android. The Lumia, which has been out in Europe in the form of the 710 and a fancier 800 model (introduced in London Nov. 30 with Deadmaus deejaying), will be available Jan. 11 in the U.S. at $49.99 with a two-year plan and is aimed at first-time buyers. (Upgraded versions are said to be on the way this spring.)

It’s the first phone since the introduction of the iPhone to give Tercek gadget lust. “Have you seen the phone?” he asked TheWrap, pointing to the OLED screen that's easily read in sunlight and the tactile response of the touch screen compared to the iPhone’s hard glass and the operating system. “It’s a wonder to behold — a terrific comeback.”

Currently the Lumia runs on Windows Phone, but like the rest of the Microsoft offerings to come, it likely will move to the Windows 8 format.

“I’ve talked to people who are on the inside as developers and designers of the phone and they’re pretty excited," Fred Hickey, who writes the widely read newsletter High Tech Strategist, told TheWrap. "So even people who were skeptical about Microsoft in the past are excited about these new offerings.”

And if a report of a leaked internal document is correct, the company's planning to stack the deck for Lumia, combining with its phone partners what's described as a $200 million "marketing tsunami" in the U.S. alone for Lumia.

Finally, reinforcing the sense of company's refreshed zeal to compete in the phone arena, a Wall Street Journal report cited secret talks that Microsoft and Nokia were holding to acquire struggling competitor and BlackBerry maker Research in Motion.

>> Even the search business that some thought Microsoft had largely ceded to Google is beginning to look more robust. Partly thanks to a useful partnership with Facebook and partly to a mandate to give customers more practical — and fewer unfiltered — results, its Bing has been growing in market share, mostly at the expense of Yahoo, in some part thanks to a re-energized ad campaign. (Though a Sunday New York Times piece on Google's new ad campaign for search noted, "An added incentive is that Google's main rival, Microsoft's Bing, also has a new ad campaign.")

Indeed, so promising is 2012 for Microsoft that Standard & Poor’s equity analyst Angelo Zino has a "Buy" rating on the company, based both on the company’s core business and the new initiatives, especially the much revamped new operating system.

"I think Windows 8 is the best thing they’ve got out there, and it’s really going to be critical. It’s almost like an 'all-in' kind of approach, and it’s one of those things where they've got to get this right, and if they don’t they’re going to miss the boat on the whole mobile space,” Zino told TheWrap.

But it's not just the products. Another change at the company is a more measured approach to going public with its innovations.

Microsoft, a giant presence at the annual Consumer Electronics Show, recently said next week's gathering will be its last, claiming the massive convention's timing is not always in sync with its product announcements.

And until scattered recent announcements focusing on Windows 8 and mobile, the reinvigoration of the company has been mostly behind the scenes. Not surprising, since Microsoft may have been feeling chastened by some past — and more ballyhooed — attempts at rejiggering its profile.

Ironically, though it's only three places beneath Apple in the Fortune 500 — at No. 38, with $62 billion in revenue, thanks mostly to its core software and server businesses — its steadily strong profits have been overshadowed by the failure of such ancillary products as the Zune MP3 player and the Windows Vista operating system.

The recent acquisition of Skype for a pricey $8.5 billion also drew fire. By the time the Redmond, Wash., giant announced a deal with struggling Finnish phone manufacturer Nokia this past February, “Microsoft had pissed away the previous 10 years in mobile with one humiliating failure after another," Tercek told TheWrap.

"Microsoft Mobile was a joke, the Windows phone was a joke, and they were humiliated," he added. "So when the Nokia deal was announced the general reaction was, 'Great, you tie two stones together, they still can’t float.'"

Ballmer has been the focus of much shareholder criticism and was even targeted in May by feared hedge-fund activist David Einhorn, not just for the stolid share price that's long hovered under $30, but for overseeing the company’s $2.56 billion loss in their search unit.

No serious observers believed the fantasy solution that founder Bill Gates would step back in. Instead, it was announced last month that Andy Lees, head of the company's Windows Phone division for the past three years, will be moved into a "time-critical" mission to further integrate Windows 8 with mobile devices, in line with what Lees earlier this year described as "a single ecosystem" integrating phones, televisions and tablets.

Indeed, all this intuitive gadgetry, is helping people forget "the Microsoft of yore with the blue screen of death," Tercek told TheWrap. "With all these great user interface advances, they're showing they can continue to innovate."

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